Recently, I had a client ask that I draw up a contract for a new business deal he had just negotiated. It was a sophisticated deal, and my client was sure that he had ironed out all the details. But – just to make sure everyone was on the same page – I recommended that we first start with a letter of intent, rather than go straight to a binding contract. And I’m glad my client heeded my advice.
As it turns out, as we worked our way through that letter of intent, the parties quickly learned that they were not on the same page. Where my client thought he had negotiated for the purchase of certain intellectual property, the other party had the impression he had only agreed to license that same property – a distinction that could have had an enormous impact on my client’s future business plans.
The parties were forced back to the negotiating table, but because we learned of this misunderstanding early in the process, we were able to quickly and efficiently pivot to a deal structure that worked for both sides. Had we not started the process with a letter of intent, we likely would have burned a lot of time and money on a binding contract that didn’t fit the deal. Or, worse, an ill-fitted contract could have blown up the deal or even led to litigation. In this case, simply outlining the deal terms in a letter of intent early in the process may have saved the deal.
But, in many cases, it’s not enough to simply outline the deal points. A well-prepared letter of intent should also include provisions that protect each party’s respective ongoing business operations. For example, a letter of intent should include strong confidentiality provisions that allow the parties to share proprietary information that may be necessary or appropriate for exploring a proposed deal, while still keeping that information protected, particularly if a deal is never finalized. Similarly, in a purchase and sale context, a letter of intent should have exclusivity provisions that prevent a seller from shopping the buyer’s offer in hopes of soliciting a better offer from the market, and, vice versa, provisions that prevent a buyer from shopping for a better price from another seller. Through these protective measures, we help safeguard each party’s ongoing business operations, while also fostering a more trusting, and thus more successful, business relationship.
For some, a letter of intent may seem like a waste of time and money; an unnecessary “add on” for the desired end product, a final and binding contract. But the fact is, more important than having a binding contract is knowing that both parties are on the same page. Starting with a letter of intent provides an excellent tool for ensuring that both parties are on the same page and that their expectations are aligned. And, having experienced counsel at your side through that letter of intent process will help ensure that your new deal – and your new business relationship – both get off on the right foot.
Have you ever had a business deal or relationship sour due to a misunderstanding or disparate expectations? Or, worse, has a failure to see eye-to-eye landed you in expensive litigation? Though not a silver bullet for all of the world’s problems, a letter of intent and the advice of experienced counsel can help avoid these situations and keep your business deal on track.